As the dust settled yesterday on the ruins of Britain’s fifth-biggest banking group [HBOS], there was little doubt as to the immediate cause of their misery – the hedge fund billionaires who have made a killing by playing poker with their livelihoods.

Rayner names names, including that of at least one New Yorker whose smile widened as the crash deepened:

Unlikely as it may have seemed even a week ago, HBOS was unable to withstand a sustained attack on its share price by mavericks who have such huge sums at their disposal that they can destroy major companies almost on a whim.

Take Philip Falcone, whose fund is said to have made £280 million by gambling that HBOS’s share price would plunge. Falcone, who has just paid £24 million in cash for a 27-room mansion in New York, has been nicknamed “The Midas of Misery” for his ability to make millions by betting on failing companies.

Falcone makes a convenient pantomime villain at a time when the nation desperately needs a hate figure. He earned a staggering £950 million last year through his hedge fund, Harbinger Capital Partners, while insisting: “It’s just money. It doesn’t define who I am.”

Rayner succinctly explains the short-selling scam and its impact, particularly when the stock market becomes as stable as a Slinky:

Mr Falcone is one of a select band of private fund managers who have made their money through the morally dubious practice of short- selling which, despite involving trading something you don’t own, is perfectly legal.

A short-seller will borrow shares from an institutional investor for a fee, agreeing to return them at a set time. The shorter sells the shares to a third party, gambling that the price will drop before they have to buy a similar number of shares to return to the lender on the set date. The difference in the price of the shares is the shorter’s profit.

Dodgy as this may sound, short-selling has been going on for hundreds of years, but the obliteration of HBOS – which has been squarely blamed on short- selling – forced the Financial Services Authority to take drastic action last night by banning short-selling of financial stocks.

Hedge fund managers (a hedge fund is a private investment fund offering the possibility of huge returns) control an estimated £2 trillion and their clout is so great that if they gang up against a company they perceive to be weak, there is little anyone can do to stop them bringing the company down.

In the same way that a donkey will become the favourite for a horse race if enough people bet on it, a company’s share price will be driven down if shorters sell enough of its stock, regardless of how healthy the company may be.

Of course, short-sellers stand to lose a fortune if share prices go up, so some have been suspected of using dirty tricks to illegally manipulate stock prices by spreading false rumours about the health of a company.

What make me laugh is the sanctimony of the huge pension funds — the ones holding your retirement money. Out of their own greed, they willingly loan the stock they’ve invested in with your money to short-sellers. It’s like your being the bank for crap-shooters who really have nothing to lose because your money hedges all their bets.

Calpers-California Public Employees’ Retirement System, the largest U.S. public pension fund, said it is no longer lending out shares of Goldman, Morgan Stanley or Wachovia. Lending of shares is an essential step in the short-selling process, and the move could help limit negative bets on those stocks. “We share a degree of concern about volatility in financials,” says Eric Baggesen, Calpers senior investment officer.

Meanwhile, New York Attorney General Andrew Cuomo said he was opening investigations into short sellers who he believes are trafficking in false rumors to manipulate the market. “No one is saying short selling caused this crisis,” Mr. Cuomo said in an interview. “I believe it’s possible that it’s been aggravated by illegal short selling — people passing on fraudulent information and conspiring to drive down the value of a stock.”

This WSJ story also reveals that now the hedge hogs are squealing on other rats — “Hey, man, don’t look at me!” — while defending their indefensible position. That’s a short-selling position for which there are no buyers. Anyway, the story continues:

Hedge-fund lobbying groups objected to the moves, saying regulators and executives haven’t presented any evidence of abusive or manipulative short selling.

“While this is all politically pleasing to the regulatory powers that be, the fact of the matter is that there has been no evidence presented of short sellers circulating false market rumors to drive down the price of stocks,” said James Chanos, a well-known short-seller and chairman of the Coalition of Private Investment Companies, a hedge-fund lobby group.

He says regulators are missing the point as the rules don’t address the large market of credit-default swaps, which are insurance contracts to debt instruments that trade outside of established exchanges and are unregulated. “The trading in those contracts dwarfs the trading in equities in financial firms. Until the SEC or Commodity Futures Trading Commission or whomever gets their hands around that, the banning of the short selling is meaningless,” Mr. Chanos said.

In a short sale, a trader sells borrowed stock, hoping it will fall in price, a practice that is permissible. In an abusive short sale, known as naked short selling, a trader never borrows any stock and doesn’t intend to deliver it to the buyer at a later date. Executives and regulators believe some traders are abusing the strategy to pummel shares of financial stocks.

Oh, so the hedge-fund industry, which is unregulated, is blaming another part of the money-changing industry that is also unregulated.

Another WSJ story reminds us of just how dangerous the Bush-Cheney regime’s scheme of privatizing Social Security would have been. Jerry Seibpoints out in his column:

Anyone want to talk about privatizing Social Security in this environment? Not likely. Imagine the national wailing and gnashing of teeth that would be going on right now if Social Security funds were in the hands of failing private financial institutions instead of the government.